Edited version of your written advice

Authorisation Number: 1012753328055

Ruling

Subject: Compensation

Question

Is the payment you received included in your assessable income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You sustained an injury at your place of employment.

Due to this injury you are disabled and will not be able to work again.

You received a lump sum payment for your Total and Permanent Disablement benefit.

The amount of compensation was X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subsection 104-25(2)

Income Tax Assessment Act 1997 paragraph 108-5(1)(b)

Income Tax Assessment Act 1997 paragraph 118-37(1)(b)

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories - income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity. Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts.

You did not earn the lump sum payment as it does not directly relate to services performed. The payment is a one-off payment and does not have any element of recurrence or regularity.

Thus, the lump sum payment is not ordinary income and is not assessable under subsection 6-5(2) of the ITAA 1997.

Capital gains

Paragraph 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right within the definition of a capital gains tax (CGT) asset. A taxpayer's right to seek compensation is therefore classified as an intangible CGT asset.

Section 104-25 of the ITAA 1997 discusses CGT event C2 which refers to cancellation, surrender and similar endings. CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being surrendered or forfeited.

Subsection 104-25(2) of the ITAA 1997 states that the time of the event is:

(a)   when you enter into the contract which results in the asset ending; or

(b)   if there is no contract when the asset ends.

Taxation Ruling TR 95/35 indicates that settlement of a personal injury claim, represents the disposal of an asset, as the taxpayer has disposed of the right to seek compensation for the losses arising from the injury suffered.

The disposal of an asset gives rise to a CGT event. However, paragraph 118-37(1)(b) of the ITAA 1997 disregards payments or receipts where the amount relates to compensation or damages a person receives for any wrong, injury or illness that they suffer.

As such, the lump sum payments received by you for your total and permanent disablement is not assessable under subsection 6-5(2) of the ITAA 1997 as it is not ordinary income. Further, the lump sum payment can be disregarded under paragraph 118-37(1)(b) of the ITAA 1997 as the compensation related to an injury. Therefore, the amount you received will not be included in your assessable income.